–Bond Bubble:Gillian Tett says the danger of a bubble is in the bond market. “It might sound reminiscent of 1999, when “fashionable” technology stocks last soared on this scale. But there is a twist: today it is not equities but bond markets that may yet be the most significant cause of concern. In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.” Read More »

–Death By Finance:Dani Rodrik looks at how financial markets view emerging economies. “This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago. First, emerging-market hype is just that. Economic miracles rarely occur, and for good reason. Governments that can intervene massively to restructure and diversify the economy, while preventing the state from becoming a mechanism of corruption and rent-seeking, are the exception. China and (in their heyday) South Korea, Taiwan, Japan, and a few others had such governments; but the rapid industrialization that they engineered has eluded most of Latin America, the Middle East, Africa, and South Asia. Instead, emerging markets’ growth over the last two decades was based on a fortuitous (and temporary) set of external circumstances: high commodity prices, low interest rates, and seemingly endless buckets of foreign finance. Improved macroeconomic policy and overall governance helped, too, but these are growth enablers, not growth triggers.” Read More »

–Manufacturing Renaissance:Matt Yglesias posts three charts on the myth of the manufacturing renaissance. “Nobody thought that the aughts were a period of manufacturing renaissance. That was the period of “financialization” in which all our manufacturing jobs were being shipped overseas to China. And then at the end of the aughts we had a huge recession. The entire renaissance looks to be a very partial recovery of jobs lost during the recession. Not a full recovery of those jobs, and nothing even remotely resembling a return to 1990s-levels of manufacturing employment. And the 1990s, you’ll recall, were not exactly the heyday of American manufacturing either. That was when everyone was complaining about the “giant sucking sound” from Mexico.”

–China Slowdown:James Hamilton looks at potential effects of a China slowdown. “A significant economic downturn in China could well mean a collapse in oil prices. One would think that, as a net importer, this would be an overall favorable development for the United States, and certainly it would be a significant plus for many individual U.S. firms and producers. But it’s worth remembering what happened after the collapse in oil prices in 1986. In the years leading up to that, just as today, there had been a dramatic economic boom in the U.S. oil-producing states, as oil producers invested heavily in more expensive projects. When oil prices collapsed, domestic producers took a significant hit. The labor and capital that had specialized for that sector can not costlessly move to other regions and activities.”

–Fertility Rates:Gillian Tett examines the effect falling fertility rates have on the tax base in Europe. “In theory, as my colleague Michael Stothard notes, an ageing population can help boost bond markets by creating more demand for fixed income products. In practice, though, a decline in a working population also raises big fiscal questions: will there be enough workers to generate the growth that is needed to service government debt? Of course, this is not just a eurozone headache. Although the US is blessed with far more favourable demographics than the eurozone, parts of the country are being hurt by population swings too. Since 2010, for example, Detroit is estimated to have lost about 25 per cent of its working age population because of migration flows; this has devastated the tax revenue base, and contributed to the current fiscal crisis.” Read More »

–U.S., Euro Zone Debt:Gillian Tett looks at the changes in U.S. and euro zone household debt. “Late last month, the International Monetary Fund published its World Economic Outlook, in which a tiny chart (on page 5) shows that American household debt, as a proportion of income, declined from 130 per cent in 2007 to 105 per cent at the end of 2012. In the same period, eurozone household debt has risen from 100 per cent to almost 110 per cent. Historically, Europeans always had a lower debt ratio than Americans, but those two lines have now crossed. It is a stark contrast to the pattern in 2000, say, when the ratio was only 80 per cent in the eurozone — and 90 per cent in America.”

–Bernanke and Bubbles:Paul Krugman examines whether Fed policy is creating bubbles. “One should never forget the example of Japan, where bets against government bonds — justified by more or less the same arguments currently made to justify claims of a U.S. bond bubble — ended in grief so often that the whole trade came to be known as the “widow maker.” At this point, Japan’s debt is well over twice its G.D.P., its budget deficit remains large, and the interest rate on 10-year bonds is 0.6 percent. No, that’s not a misprint. O.K., what about stocks? Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits — which are, after all, what stocks are shares in — are more than two-and-a-half times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher. All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment.”

–Economists:Dani Rodrik asks what use are economists. “There is one other thing that the public should know about economists: It is cleverness, not wisdom, that advances academic economists’ careers. Professors at the top universities distinguish themselves today not by being right about the real world, but by devising imaginative theoretical twists or developing novel evidence. If these skills also render them perceptive observers of real societies and provide them with sound judgment, it is hardly by design.” Read More »

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